Montgomery County Nursing HomePatient accounts receivable, net 79,801 2,652 82,453 Accounts payable...

Montgomery County Nursing Home A Component Unit of Montgomery County, Arkansas

Accountants’ Report and Financial Statements June 30, 2010


June 30, 2010

Contents

Independent Accountants’ Report on Financial Statements and Supplementary Information ............................................................................................... 1

Management’s Discussion and Analysis ............................................................................. 2 Financial Statements

Balance Sheets.................................................................................................................................... 6

Statements of Revenues, Expenses and Changes in Net Assets ......................................................... 7

Statements of Cash Flows .................................................................................................................. 8

Notes to Financial Statements .......................................................................................................... 10


Management’s Discussion and Analysis Year Ended June 30, 2010

2

Introduction

This management’s discussion and analysis of the financial performance of Montgomery County Nursing Home (the Nursing Home) and Montgomery County Assisted Living (the Assisted Living Facility) (collectively, the Organization) provides an overview of the Organization’s financial activities for the year ended June 30, 2010. It should be read in conjunction with the accompanying financial statements of the Organization. The year ended June 30, 2010, is the first 12-month period in which the Organization has reported its financial statements in conformity with GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments, as amended. In the initial year of the application of that statement, governments are not required to restate prior periods for purposes of providing the comparative data for management’s discussion and analysis. In future years, when prior-period information is available, a comparative analysis of financial data will be presented.

Using This Annual Report

The Organization’s financial statements consist of three statements – a balance sheet, a statement of revenues, expenses and changes in net assets and a statement of cash flows. These statements provide information about the activities of the Organization. The Organization presents separate fund financial statements for the operations of the Nursing Home and for the Assisted Living Facility. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The Organization, consisting of its two separate funds, is accounted for as government with multiple business-type activities and presents its financial statements using the economic resources measurement focus and the accrual basis of accounting.

The Balance Sheet and Statement of Revenues, Expenses and Changes in Net Assets

One of the most important questions asked about any organization’s finances is: “Is the organization, as a whole, better or worse off as a result of the year’s activities?” The balance sheet and the statement of revenues, expenses and changes in net assets report information about the Organization’s resources and its activities in a way that helps answer this question. These statements include all assets and all liabilities using the accrual basis of accounting. Using the accrual basis of accounting means that all of the current year’s revenues and expenses are taken into account regardless of when cash is received or paid.

These two statements report the Organization’s net assets and changes therein. The Organization’s total net assets – the difference between assets and liabilities – is one measure of the Organization’s financial health or financial position. Over time, increases or decreases in the Organization’s net assets are an indicator of whether its financial health is improving or deteriorating. Other nonfinancial factors, such as changes in the Organization’s patient base, changes in legislation and regulations, measures of the quantity and quality of services provided to its patients and local economic factors should also be considered to assess the overall financial health of the Organization.

3

The Statement of Cash Flows

The statement of cash flows reports cash receipts, cash payments and net changes in cash resulting from four defined types of activities. It provides answers to such questions as where did cash come from, what was cash used for and what was the change in cash and cash equivalents during the reporting period.

The Organization’s Net Assets

The Organization’s net assets are the difference between its assets and liabilities reported in the balance sheets.

Table 1: Assets, Liabilities and Net Assets

Assets Patient accounts receivable, net 236,756$ Other current assets 2,009,697 Capital assets, net 6,439,101

Total assets 8,685,554$

Liabilities Accounts payable, accrued expenses and due to residents 310,202$

Total liabilities 310,202

Net AssetsInvested in capital assets, net of related debt 6,439,101 Unrestricted 1,936,251

Total net assets 8,375,352

Total liabilities and net assets 8,685,554$

During the year, the Organization’s assets increased in total by approximately $391,000. A significant change in the Organization’s assets during the year was a $76,015 noncash transfer from the Nursing Home to Montgomery County (the County) of County land no longer intended for the use of the Nursing Home.

Operating Results and Changes in the Organization’s Net Assets

The Organization’s net assets increased by approximately $391,000 during the year. The increase is made up of several different components as shown in Table 2. The Organization reported operating income of $345,618 during the year and reported net nonoperating revenues of $2,815 during the year, of which the largest nonoperating revenue was $75,848 in noncapital gifts made to the Organization.

4

Table 2: Operating Results and Changes in Net Assets

Operating RevenuesNet patient service revenue 7,083,233$ Other 40,278

Total operating revenues 7,123,511

Operating ExpensesSalaries and wages and employee benefits 4,822,146 Purchased services and professional fees 104,446 Depreciation 290,898 Other operating expenses 1,560,403

Total operating expenses 6,777,893

Operating Income 345,618

Nonoperating Revenues (Expenses)Investment income 3,112 Loss on sale of fixed assets (130) Noncapital gifts 75,848 Contribution of land to county (76,015)

Total nonoperating expenses 2,815

Capital Grants and Gifts 42,486

Increase in net assets 390,919$

Operating Income

The first component of the overall change in the Organization’s net assets is its operating income or loss – generally, the difference between net patient service and other operating revenues and the expenses incurred to perform those services. The Organization has reported operating income of $345,618 for the year ended June 30, 2010.

Nonoperating Revenues (Expense)

Nonoperating revenues (expenses) consist primarily of investment income and contributions, net of contributions paid to Montgomery County and loss on sale of assets. The Organization has reported net nonoperating revenues of $2,815 for the year ended June 30, 2010.

5

Capital Grants and Gifts

The Organization received gifts and grants of $42,486 from a foundation and a state agency to purchase specific capital assets in 2010. Substantially all of these gifts have been expended and are reflected in unrestricted net assets as of June 30, 2010.

The Organization’s Cash Flows

The Organization’s cash flows are consistent with changes in operating income and nonoperating revenues and expenses as reviewed above.

Capital Assets

The Organization’s total investment in capital assets, net of accumulated depreciation, is $6,439,101 at June 30, 2010, as detailed in Note 5 to the financial statements.

Financing Arrangements

The Organization did not have any long-term obligations at June 30, 2010.

Contacting the Organization’s Financial Management

This financial report is designed to provide our patients, suppliers, constituents and creditors with a general overview of the Organization’s finances and to show the Organization’s accountability for the money it receives. Questions about this report and requests for additional financial information should be directed to the Organization’s Administrator, Bryan Wann, by calling 870.867.2156.


Balance Sheets June 30, 2010

See Notes to Financial Statements 6

AssetsMontgomery

County Nursing Home

Montgomery County Assisted

Living TotalCurrent Assets

Cash 1,850,185$ 132,174$ 1,982,359$ Patient accounts receivable, net of

allowance of $21,251 220,109 16,647 236,756 Prepaid expenses and other 18,057 9,281 27,338

Total current assets 2,088,351 158,102 2,246,453

Capital Assets, Net 3,741,946 2,697,155 6,439,101

Total assets 5,830,297$ 2,855,257$ 8,685,554$

Liabilities and Net Assets

LiabilitiesAccounts payable 94,527$ 16,503$ 111,030$ Accrued expenses 159,949 14,138 174,087 Due to residents 20,792 4,293 25,085

Total current liabilities 275,268 34,934 310,202

Net Assets

Invested in capital assets, net of related debt 3,741,946 2,697,155 6,439,101 Unrestricted 1,813,083 123,168 1,936,251

Total net assets 5,555,029 2,820,323 8,375,352

Total liabilities and net assets 5,830,297$ 2,855,257$ 8,685,554$


Statements of Revenues, Expenses and Changes in Net Assets Year Ended June 30, 2010


Montgomery County Nursing

Home


Living TotalOperating Revenues

Net patient service revenue, net of provisionfor bad debts of $22,006 6,170,872$ 912,361$ 7,083,233$

Other 29,490 10,788 40,278

Total operating revenues 6,200,362 923,149 7,123,511

Operating ExpensesSalaries and wages 3,573,671 489,065 4,062,736 Employee benefits 678,067 81,343 759,410 Purchased services and professional fees 94,246 10,200 104,446 Supplies and other 1,327,600 232,803 1,560,403 Depreciation and amortization 192,470 98,428 290,898

Total operating expenses 5,866,054 911,839 6,777,893

Operating Income 334,308 11,310 345,618

Nonoperating Revenues (Expenses)Investment income 2,977 135 3,112 Loss on sale of fixed assets (130) - (130) Noncapital gifts 58,902 16,946 75,848 Contribution of land to the County (76,015) - (76,015)

Total nonoperating revenues (expenses) (14,266) 17,081 2,815

Excess of Revenues Over Expenses 320,042 28,391 348,433

Capital Grants and Gifts 42,486 - 42,486

Increase in Net Assets 362,528 28,391 390,919

Net Assets, Beginning of Year 5,192,501 2,791,932 7,984,433

Net Assets, End of Year 5,555,029$ 2,820,323$ 8,375,352$


Statements of Cash Flows Year Ended June 30, 2010



Home


Living Total

Operating ActivitiesReceipts from and on behalf of patients 6,250,673$ 915,013$ 7,165,686$ Payments to suppliers and contractors (1,420,327) (272,439) (1,692,766) Payments to employees (4,237,332) (556,002) (4,793,334) Other receipts, net 29,490 10,788 40,278

Net cash provided by operating activities 622,504 97,360 719,864

Noncapital Financing ActivitiesNoncapital gifts 58,902 16,946 75,848

Net cash provided by noncapital financing activities 58,902 16,946 75,848

Capital and Related Financing ActivitiesPurchase of capital assets (89,690) (33,042) (122,732) Proceeds from sales of capital assets 850 - 850

Net cash used in capital and related financing activities (88,840) (33,042) (121,882)

Investing ActivitiesInterest on investments 2,977 135 3,112

Net cash provided by investing activities 2,977 135 3,112

Increase in Cash 595,543 81,399 676,942

Cash, Beginning of Period 1,254,642 50,775 1,305,417

Cash, End of Period 1,850,185$ 132,174$ 1,982,359$


Statements of Cash Flows (Continued) Year Ended June 30, 2010



Home


Living Total

Reconciliation of Operating Income to Net Cash Provided by Operating Activities

Operating income 334,308$ 11,310$ 345,618$ Depreciation and amortization 192,470 98,428 290,898 Changes in operating assets and liabilities

Patient accounts receivable, net 79,801 2,652 82,453 Accounts payable and accrued expenses 8,338 (8,312) 26 Other assets and liabilities 7,587 (6,718) 869

Net cash provided by operating activities 622,504$ 97,360$ 719,864$

Supplemental Cash Flows Information

Capital assets acquired through noncash capitalgrants and gifts 42,486$ -$ 42,486$

Contribution of land to the County 76,015$ -$ 76,015$


Notes to Financial Statements June 30, 2010

10

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations and Reporting Entity

Montgomery County Nursing Home is located in Montgomery County, Arkansas, and is a component unit of Montgomery County, Arkansas. The Montgomery County Judge appoints the Organization’s Board of Directors, and those appointments are approved by the Montgomery County Quorum Court.

The Board of Directors for Montgomery County Nursing Home also serves as the Board of Directors for Montgomery County Assisted Living Facility. The Montgomery County Assisted Living Facility is not a separate legal entity and is therefore presented as a separate fund of Montgomery County Nursing Home (collectively, the Organization).

The Organization’s revenues are primarily earned from the operation of a 112-bed skilled nursing facility and a 32-bed assisted living facility, which is licensed for 42-beds.

Basis of Accounting and Presentation

The financial statements of the Organization have been prepared on the accrual basis of accounting using the economic resources measurement focus. Revenues, expenses, gains, losses, assets and liabilities from exchange and exchange-like transactions are recognized when the exchange transaction takes place, while those from nonexchange transactions (principally contributions) are recognized when all applicable eligibility requirements are met. Operating revenues and expenses include exchange transactions and program-specific, government-mandated nonexchange transactions. Investment income and contributions are included in nonoperating revenues and expenses. The Organization first applies restricted net assets when an expense or outlay is incurred for purposes for which both restricted and unrestricted net assets are available.

The Organization prepares its financial statements as an entity with multiple business-type activities or multiple enterprise funds in conformity with applicable pronouncements of the Governmental Accounting Standards Board (GASB). Pursuant to GASB Statement No. 20, the Organization has elected to apply the provisions of all relevant pronouncements of the Financial Accounting Standards Board (FASB) that were issued on or before November 30, 1989, and do not conflict with or contradict GASB pronouncements. The Organization reports the following major enterprise funds/business-type activities:

Montgomery County Nursing Home (the Nursing Home) – accounts for the Organization’s nursing home operations.

Montgomery County Assisted Living (the Assisted Living Facility) – accounts for the activities at the Organization’s assisted living facility.

As a general rule, the effect of any interfund activity is eliminated from the total column in the financial statements.



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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Risk Management

The Organization is exposed to various risks of loss from theft of, damage to and destruction of assets; natural disasters; and employee health and accident benefits. Commercial insurance coverage is purchased for claims arising from such matters. Settled claims have not exceeded this commercial coverage in any of the three preceding years.

Patient Accounts Receivable

The Organization reports patient accounts receivable for services rendered at net realizable amounts from third-party payers, patients and others. The Organization provides an allowance for uncollectible accounts based upon a review of outstanding receivables, historical collection information and existing economic conditions.

Capital Assets

Capital assets are recorded at cost at the date of acquisition or fair value at the date of donation if acquired by gift. Depreciation is computed using the straight-line method over the estimated useful life of each asset.

Land improvements 15 – 20 yearsBuildings and improvements 20 – 40 yearsEquipment 5 – 20 years



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Compensated Absences

Organization policies permit most employees to accumulate vacation and sick leave benefits that may be realized as paid time off or, in limited circumstances, as a cash payment. Expense and the related liability are recognized as vacation benefits are earned, whether the employee is expected to realize the benefit as time off or in cash. Expense and the related liability for sick leave benefits are recognized when earned to the extent the employee is expected to realize the benefit in cash, determined using the termination payment method. Sick leave benefits expected to be realized as paid time off are recognized as expense when the time off occurs and no liability is accrued for such benefits employees have earned but not yet realized. Compensated absence liabilities are computed using the regular pay and termination pay rates in effect at the balance sheet date plus an additional amount for compensation-related payments, such as social security and Medicare taxes, computed using rates in effect at that date.

Net Assets

Net assets of the Organization are classified in three components. Net assets invested in capital assets, net of related debt consist of capital assets net of accumulated depreciation and reduced by the outstanding balances of borrowings used to finance the construction of these assets. Restricted expendable net assets are noncapital assets that must be used for a particular purpose as specified by creditors, grantors or donors external to the Organization. The Organization had no restricted expendable net assets at June 30, 2010. Unrestricted net assets are remaining assets less remaining liabilities that do not meet the definition of invested in capital assets, net of related debt or restricted expendable.

Net Patient Service Revenue

The Organization has agreements with third-party payers that provide for payments to the Organization at amounts different from its established rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered and includes estimated retroactive revenue adjustments and a provision for uncollectible accounts. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered and such estimated amounts are revised in future periods as adjustments become known.

Income Taxes

As an essential government function of Montgomery County, Arkansas, the Organization is generally exempt from federal and state income taxes under Section 115 of the Internal Revenue Code and a similar provision of state law. However, the Organization is subject to federal income tax on any unrelated business taxable income.



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Note 2: Net Patient Service Revenue

The Organization has agreements with third-party payers that provide for payments to the Organization at amounts different from its established rates. These payment arrangements include:

Medicare. The Nursing Home has been reimbursed for services rendered to patients covered by the federal Medicare program on a prospective payment system for Part A Medicare services and on a fee schedule basis for Part B Medicare therapy services. The reimbursement plan is on a prospective basis and no additional settlement will be made on the difference between the rates paid and actual costs.

Medicaid. The Arkansas Medicaid reimbursement plan is a cost-based system where each organization in the state is reimbursed based on its own unique per diem rate. The Nursing Home is paid by a Medicaid per diem rate. The Medicaid per diem consists of three separate components: direct care, indirect and administrative and fair rental value. The direct care component is specific to the cost of providing care incurred by the Nursing Home; indirect and administrative is a statewide class rate; and the fair rental component is based on the current asset value of the Nursing Home and various other components, including professional liability insurance.

A quality assurance fee is paid by each skilled nursing facility in the state based on the number of days of care rendered. The amount raised through the quality assurance fee is matched by federal funding and used to supplement the state of Arkansas’ budget for nursing home reimbursement payments.

The Assisted Living Facility is reimbursed by the Arkansas Medicaid program under a tier level payment system. Each resident of the Assisted Living Facility is designated within one of the four tier levels as determined by the level of care provided by the Assisted Living Facility.

Approximately 66% and 35% of net patient service revenues of the Nursing Home and the Assisted Living Facility, respectively, are from participation in the Medicare and state-sponsored Medicaid programs for the year ended June 30, 2010. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation and change. As a result, it is reasonably possible that recorded estimates will change materially in the near term.

Note 3: Deposits, Investments and Investment Income

Deposits

Custodial credit risk is the risk that in the event of a bank failure, a government’s deposits may not be returned to it. The Organization’s deposit policy for custodial credit risk requires compliance with the provisions of state law.



14

State law requires collateralization of all deposits with federal depository insurance; bonds and other obligations of the U.S. Treasury, U.S. agencies or instrumentalities or the state of Arkansas; bonds of any city, county, school district or special road district of the state of Arkansas; bonds of any state; or a surety bond having an aggregate value at least equal to the amount of the deposits.

At June 30, 2010, cash consisted primarily of demand deposit accounts.

The financial institution holding the Organization’s cash accounts is participating in the FDIC’s Transaction Account Guarantee Program. Under the program, through December 31, 2010, all noninterest-bearing transaction accounts at this institution are fully guaranteed by the FDIC for the entire amount in the account. Pursuant to legislation enacted in 2010, the FDIC will fully insure all noninterest-bearing transaction accounts beginning December 31, 2010 through December 31, 2012, at all FDIC-insured institutions.

Effective July 21, 2010, the FDIC’s insurance limits were permanently increased to $250,000. At June 30, 2010, the Organization’s interest-bearing bank balances were exposed to custodial credit risk as follows:

Montgomery County Nursing Home

Montgomery County

Assisted Living Total

Uninsured and uncollateralized 30,917$ 0$ 30,917$

Subsequent to year-end, the financial institution holding the Organization’s cash accounts pledged securities worth $1,700,000 as collateral against the Organization’s deposits.

Summary of Carrying Values

The carrying values of deposits are included in the balance sheets as follows:


Montgomery County


Carrying valueDemand deposit checking accounts 1,850,185$ 132,174$ 1,982,359$

Included in the following balance sheet captions

Cash 1,850,185$ 132,174$ 1,982,359$



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Investment Income

Investment income for the year ended June 30, 2010, consisted of:


Montgomery County


Interest income 2,977$ 135$ 3,112$

Note 4: Patient Accounts Receivable

The Organization grants credit without collateral to its patients, many of whom are area residents and are insured under third-party payer agreements. Patient accounts receivable at June 30, 2010, consisted of:


Montgomery County


Medicare 106,346$ -$ 106,346$ Medicaid 83,894 14,152 98,046 Patients 29,869 2,495 32,364

220,109$ 16,647$ 236,756$



16

Note 5: Capital Assets

Capital assets activity for the period ended June 30, 2010, was:

Beginning Ending Balance Additions Disposals Balance

Land and land improvements 394,327$ 980$ 76,015$ 319,292$ Buildings and improvements 3,684,946 31,599 - 3,716,545 Equipment 1,088,383 100,935 12,105 1,177,213

5,167,656 133,514 88,120 5,213,050

Less accumulated depreciationLand improvements 60,666 9,269 - 69,935 Buildings and improvements 641,095 92,807 - 733,902 Equipment 586,660 90,394 9,787 667,267

1,288,421 192,470 9,787 1,471,104

Capital assets, net 3,879,235$ (58,956)$ 78,333$ 3,741,946$




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Beginning Ending Balance Additions Disposals Balance

Land and land improvements 181,816$ -$ -$ 181,816$ Buildings and improvements 2,536,651 3,373 - 2,540,024 Equipment 232,030 29,669 - 261,699

2,950,497 33,042 - 2,983,539

Less accumulated depreciationLand improvements 24,123 12,120 - 36,243 Buildings and improvements 126,207 63,305 - 189,512 Equipment 37,626 23,003 - 60,629

187,956 98,428 - 286,384

Capital assets, net 2,762,541$ (65,386)$ 0$ 2,697,155$

Montgomery County Assisted Living

Note 6: Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses included in current liabilities at June 30, 2010, consisted of:


Montgomery County


Payable to suppliers and residents 115,319$ 20,796$ 136,115$ Payable to employees (including payroll taxes and benefits) 159,949 14,138 174,087

275,268$ 34,934$ 310,202$



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Note 7: Capital Grants and Gifts

The Nursing Home received a capital grant for approximately $34,000 through the Arkansas State Highway and Transportation Department for the acquisition of a bus under the Elderly Persons and Persons with Disabilities Capital Assistance Program. Under this program the Nursing Home was required to bear 20% of the costs of the acquired vehicle; approximately $8,000 was contributed by the Montgomery County Nursing Home Auxiliary to fund the Nursing Home’s share of the cost.

Note 8: Malpractice Claims

The Organization is immune from liability and from suit for damages under Arkansas Code Annotated § 21-9-301. Under that statute, all counties, municipal corporations, school districts, special improvement districts, and all other political subdivisions of the state and any of their boards, commissions, agencies, authorities or other governing bodies shall be immune from liability and from suit for damages except to the extent that they may be covered by liability insurance. The Organization did not carry any liability insurance at June 30, 2010.

Note 9: Retirement Plan

The Organization contributes to a defined contribution pension plan, in the form of a simplified employee pension (SEP) plan, covering all department heads. Each eligible employee has an individual retirement account (SEP-IRA) to which both the employee and employer may contribute. Employer contributions are made to each SEP-IRA based on a percent of each employee’s compensation. Contributions actually made by the Nursing Home and the Assisted Living Facility for the year ended June 30, 2010, were $54,851 and $5,109, respectively.

Note 10: Risks and Uncertainties

Current Economic Conditions

The current protracted economic decline continues to present health care facilities with difficult circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair value of other assets, large potential declines in revenues, constraints on liquidity and difficulty obtaining financing. The financial statements have been prepared using values and information currently available to the Organization.

Current national and state economic conditions and federal legislation could have an adverse effect on the Organization’s cash flows related to the Medicare and Medicaid programs. The volatility of current economic conditions and potential impact on occupancy levels and payments from insured payers could negatively impact the Organization’s ability to maintain sufficient liquidity.



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Note 11: Litigation

The management and certain board members of the Organization are the subjects of a complaint initially filed March 1, 2010, and which was subsequently amended August 12, 2010, in the Circuit Court of Montgomery County. This complaint makes several allegations regarding noncompliance with state and local laws and other matters relating to the management and operation of the Nursing Home and Assisted Living Facility by management and the Board of Directors. Among the allegations cited is that the Organization failed to include their employees in the Arkansas Public Employees Retirement System (APERS), and that the Organization failed to pay 100% of the required monthly premiums for each employee electing individual coverage under the county health insurance plan and $125 of the required monthly premium for family coverage under the plan if so elected. The Organization is evaluating all allegations in the complaint to determine the validity of the complaint. A copy of the complaint was sent to APERS for their evaluation of the portion of the complaint specifically relating to APERS and the Organization’s employees. However, APERS is currently still evaluating this claim and has not yet provided a ruling on this matter. The amount of potential loss, if any, as a result of this complaint is not currently estimable, although management does not believe the effects will ultimately be material. Events could occur that would cause any estimate of ultimate loss to differ materially in the near term. Accordingly, as of June 30, 2010, no amounts have been accrued related to this complaint.

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